The%20Expectation%20Hypothesis%20formula%20explained

# The%20Expectation%20Hypothesis%20formula%20explained -...

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i 1t + i e 1t+1 + i e 1t+2 +…+ i e 1t+n-1 i nt = n i nt =The yield on a n-yr bond purchased today. (Matures n-years from now) i 1t =The yield on a 1-yr bond purchased today. (Matures 1-year from now) i e 1t+1 = The expected yield on a 1-yr bond purchased one year from now. (Matures 1-yr after purchase, or two years from today). i e 1t+2 = The 1-yr bond purchased two years from now. (Matures 1-yr after purchase, or three years from today). The t is today, the t+1 is one period after today, the t+2 is two periods after today, and so on. .. Prepared by:

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Remember that “ today” we only know the yields on bonds that have different maturities, yet we can form expectations about tomorrow’s yields. EXAMPLE : Say you are given the following current information on yields on treasury bonds (today, this is all you know for sure): Maturity 1 year 2 years 3 years Yield 2.08 1.98 2.24 Then, you are asked the following: What do investors expect the interest rate will be on the 1-year bond two years from now? In other
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## This note was uploaded on 02/22/2011 for the course ECO 029 taught by Professor Anthonyp.o'brien during the Spring '08 term at Lehigh University .

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The%20Expectation%20Hypothesis%20formula%20explained -...

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